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Auto-Pilot: Getting Nowhere Fast

One slip, and down the hole we fall
It seems to take no time at all
A momentary lapse of reason

- Pink Floyd

The momentary lapses of reason seem to be piling up in
Washington. One commentator recently spoke of corporate America's
obsession with achieving earnings in the short run, even to the
detriment of long-term success. It seems, according to this
commentator, that Washington has followed suit and our elected
leaders are now managing towards weekly poll figures rather than
long-term economic recovery.

As one example, I now know more about GM and the rest of the auto
industry than ever before. It's a wonder there would be any
uncertainty regarding yesterday's bankruptcy filing given the
incessant media coverage along with countless hours of our
government representatives' time. Perhaps the drama that has
unfolded is the true cause of CBS' cancellation of Guiding
Light after 72 years and some 16,000 episodes. Who wants to
watch fake drama when they can get the real thing?

Unfortunately, all of this time has been wasted. It was a waste for
Congress to investigate the auto companies and chide them for
flying to Washington on private jets. Not because there weren't
problems to be fixed, but because the priorities of our government
should not have put this single industry first. At a final tally
likely to be in the low 100-billion-dollar range but including
several hundred hours of research (we hope!) and analysis within
the Beltway, the move toward bankruptcy this late in the game
underscores the distraction this topic has been.

As corporations with large cash balances, many of our clients have
investment policies in place which clearly lay out the objectives
to be kept in mind when considering investment alternatives. First,
preserve capital. Second, provide liquidity. And third, achieve
acceptable return.

Even with these clearly stated priorities, some companies placed
number three ahead of the first two and ended up with such
"wonderful" investments as auction rate securities or even
mortgage-backed securities. The result of this swapping of
priorities has been painful.

Today, Congress and the remainder of our federal government
continues to focus on lower priority but more popular initiatives,
instead of bigger issues that will help the overall economy
recover. These issues are obvious and center on improving investor
and consumer confidence.

Instead, the government continues attack confidence levels by
shifting rules and guidelines with the latest polls. A recent
example includes the government's disallowing the use of future
earnings to count as capital in order to satisfy capital raises
mandated by the stress tests. Though this is not an extremely
significant hurdle, it is simply one more example of changing the
rules as the game is played.

These rule changes go to the heart of confidence in the system. How
can market participants have confidence in their consumption or
investment choices if they know tax, compensation, or capital
requirements are likely to change over time?

Instead of focusing on small potatoes such as the auto industry
problems (affecting only hundreds of thousands of jobs as opposed
to the 5.7 million and counting lost nationwide), why not develop a
long-range plan that will move the entire economy toward recovery?
Without such a vision, politicians will continue to waffle in their
actions and potential consumers/investors will remain on the
sidelines waiting for the next set of rules.

Ford's overriding slogan for years has been "Quality is job one."
Agree with their success or not, but it's true they've at least
identified their priority. Perhaps the government could take a cue
from them and figure out what should be their "job one."

Key Developments

May's consumer confidence measure jumped 14.1 points to 54.9, its
highest level since September 2008 when the crisis shifted into
high gear. (A reading of 100 reflects 1985 confidence when GDP was
4.2 percent.) Typically, this measure troughs very late in a
recession and February's 25.3 measure will likely be this cycle's
low print. However, this does not mean growth is around the corner.
Instead, it is quite possible the speed of the downturn drove
consumers quickly to their low point and will now languish until
true fundamental signs of recovery occur.

The Mortgage Banker's Association (MBA) quarterly report on the
state of the market revealed a solid jump in delinquencies and
foreclosures. The percentage of all loans past due jumped from 7.9
percent in the fourth quarter to 9.1 percent in the first.
Foreclosures rose from 1.0 percent to 1.3 percent, although they
were muted by Fannie and Freddie's moratorium on foreclosures,
which has recently ended. With some 2.7 million people and counting
out of work thus far in 2009, expect these numbers to rise in the
second and third quarters.

First quarter's GDP estimate increased from minus 6.1 percent to
minus 5.7 percent as more data has been gathered and analyzed. The
0.4 percent increase is nice; however, few "green shoots" can be
identified. On the contrary, consumer activity was revised
significantly lower, particularly for non-durable goods.

One slip, and down the hole we fall It seems to take no time at all A momentary lapse of reason

- Pink Floyd

The momentary lapses of reason seem to be piling up inWashington. One commentator recently spoke of corporate America'sobsession with achieving earnings in the short run, even to thedetriment of long-term success. It seems, according to thiscommentator, that Washington has followed suit and our electedleaders are now managing towards weekly poll figures rather thanlong-term economic recovery.

As one example, I now know more about GM and the rest of the autoindustry than ever before. It's a wonder there would be anyuncertainty regarding yesterday's bankruptcy filing given theincessant media coverage along with countless hours of ourgovernment representatives' time. Perhaps the drama that hasunfolded is the true cause of CBS' cancellation of GuidingLight after 72 years and some 16,000 episodes. Who wants towatch fake drama when they can get the real thing?

Unfortunately, all of this time has been wasted. It was a waste forCongress to investigate the auto companies and chide them forflying to Washington on private jets. Not because there weren'tproblems to be fixed, but because the priorities of our governmentshould not have put this single industry first. At a final tallylikely to be in the low 100-billion-dollar range but includingseveral hundred hours of research (we hope!) and analysis withinthe Beltway, the move toward bankruptcy this late in the gameunderscores the distraction this topic has been.

As corporations with large cash balances, many of our clients haveinvestment policies in place which clearly lay out the objectivesto be kept in mind when considering investment alternatives. First,preserve capital. Second, provide liquidity. And third, achieveacceptable return.

Even with these clearly stated priorities, some companies placednumber three ahead of the first two and ended up with such"wonderful" investments as auction rate securities or evenmortgage-backed securities. The result of this swapping ofpriorities has been painful.

Policy

About Us

Silicon Valley Bank is registered in England and Wales at 41 Lothbury, London EC2R 7HF, UK under No. FC029579. Silicon Valley Bank is authorised and regulated by the California Department of Business Oversight and the United States Federal Reserve Bank; authorised by the Prudential Regulation Authority with number 577295; and subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. Silicon Valley Bank is a subsidiary of SVB Financial Group, a Delaware corporation and is an affiliate of SVB Financial Group UK Limited. SVB Financial Group UK Ltd is registered in England and Wales at 41 Lothbury, London EC2R 7HF, UK under No. 5572575 and is authorised and regulated by the Financial Conduct Authority, with reference number 446159. SVB Financial Group and its subsidiary Silicon Valley Bank are members of the Federal Reserve System and Silicon Valley Bank is a member of the FDIC.